Rental Real Estate Taxation

Rentals in San Francisco are subject to multiple taxes.

While rental property can be an excellent investment, you're not the only one who wins when you own it. As a rental property owner, you're subject to a wide range of taxes and fees. You can expect to be taxed when you buy your property, while you own it, and when you sell it.

Property Tax

Like just about every other property owner, you will have to pay annual property tax on the value of your rental property. Its taxable value was set when you bought the property and, under California law, cannot increase by more than 2 percent per year -- unless you make major improvements, which can be separately taxed. The state property tax rate is 1 percent, although your city or county can add additional taxes or special assessments.

City Licenses

Cities can also apply taxes and fees to rental properties. In San Francisco, two different agencies can charge you for owning rental property. The treasurer requires you to file for a business license and pay business taxes if you own a rental property with four or more units. In addition, the San Francisco Rent Board also charges an annual fee of $29 per unit, as of publication.

Income Tax

The profit you earn on your rental property is subject to both federal and state income tax. Your income tax doesn't apply to your rent collections, though. You get taxed on your profit, which you calculate by subtracting all of your allowed expenses from your rent collections. Given that just about any expense that is related to your property is deductible, an accountant can help you to minimize your tax liability.

Capital Gains and Recapture

When you sell your property, you get taxed both on your capital gains and on depreciation that you claimed. For example, consider a property that you bought for $450,000 and sold for $675,000 after claiming $130,000 in depreciation while you owned it. You would pay a 15 percent federal capital gains tax on the $225,000 in profit, and 25 percent on the $130,000 in accumulated depreciation. If you sold it for $400,000, you wouldn't pay any capital gains tax, but you would have to pay the 25 percent recapture tax on the $80,000 difference between your depreciated basis and your selling price. You also have to pay state income tax on these profits and, if your income is above a certain threshold, may also have to pay a higher capital gains rate or a Medicare surtax.

Transfer Tax

When properties change hands, cities and counties in California levy a tax on the total value called a transfer tax. In San Francisco, the transfer tax is customarily paid by the seller and varies depending on the value of the property. The first $100,000 in value is tax free, while anything from $100,001 to $250,000 is taxed at 0.5 percent. Values between $250,000 and $1 million are taxed at 0.68 percent, and values from $1 million to $5 million are taxed at 0.75 percent. Value between $5 and $10 million is subject to a 2 percent tax, while anything over $10 million is taxed at 2.5 percent. For example, a $1.1 million sale would trigger a $6,600 transfer tax -- $750 on the value between $100,000 and $250,000, $5,100 on the difference between $250,000 and $1 million, and $750 on the last $100,000 dollars.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.